Monday, November 13, 2006

Calls of Note Part 3

Two tier-1 firms are commenting on Hewlett-Packard (NYSE:HPQ) this morning:

- Deutsche Banks notes they have adjusted their price target up to $40, from prior $34,
reflecting increased visibility of near-term results and expectation of a possible $0.02-$0.03 of EPS upside this quarter. Firm's revenue and EPS estimates remain unchanged.$40 price target assumes HPQ trades at 16x CY07 EPS estimate which is within HP's historical range (10x-18x since the acquisition of Compaq). The valuation is also underpinned by a 10-year DCF (WACC 9.2%, growth of 3%). At current levels they view shares of HPQ as fairly valued. Firm believes the market is discounting future EPS of ~$3.00 in CY08 and ~10% operating margins. As such they believe there is limited upside and rate HPQ's shares a Hold.

- Merrill Lynch notes that for quite some time their research has argued HP's long run earnings power should exceed $3.00. Today they increase this estimate to $3.50+. To get there, the firm analyzes $2.5bn of net realizable margin enhancement plus the effects of incremental revenue growth and buybacks.

Specifically, beyond their F2006 estimate of $2.20, the firm anticipates an incremental
$0.20 from anniversary effects of the original restructuring, $0.35 from IT consolidation; $0.20 from real estate consolidation, $0.28 from upsell and attach in PCs and industry standard servers; $0.22 from indirect procurement optimization; $0.14 from direct procurement. They then subtract $0.21 from overlap in the above categories and subtract $0.47 for margin lost to price and re-investment. From there they add $0.11 annually in earnings from incremental revenue growth ($0.34 over 3 years); and $0.14 annually in share repurchases ($0.41 over 3 years). The sum of these supports ML's $3.50+ long run earnings power estimate. Tgt goes to $46 from $42 with the analyst noting that in 18-24 months they think the stock will discount long run (~F2009) number of $3.50+ and trade around $54, a 16% compound return over the next two years.

Notablecalls: The stock is back right where UBS made their positive comments regarding their $3.00 EPS power on Oct 23. The comments from DB and ML come ahead of results scheduled for Nov 16. I wish some knucklehead analyst came out and upgraded the stock, providing traders with an almost perfect short-selling oppy. I suspect today's comments won't gap the stock high enough. But lets face it, no analyst wants to upgrade HPQ ahead of results given the streched valuation and looming corporate spending deceleration.

1 comment:

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